Vol 13 (2016) - Issue 4

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Key Insights into the Duty of Loyalty Owed by Directors: Judgment No. 5151/2015 of the Spanish Supreme Court (First Chamber) of 11 December 2015

Art. 61(1) of the Spanish Private Limited Companies Act (Ley 2/1995 de sociedades de responsabilidad limitada), dated 23 March 1995, imposes a duty of loyalty on company directors, stating that 'Directors shall discharge their duties with the diligence of an orderly businessman and loyal representative'.
Now, the duty of loyalty owed by each and every director of a particular company is the subject of countless disputes, specially in the context of groups of companies where the interests of the parent, some other group company and/or the group as a whole, may not coincide or may even collide with those of the individual company where the director serves as such.
This potential conflict of interests and the need to observe the aforementioned duty of loyalty is even more acute in the frequent cases where a shareholder appoints a senior officer (or an employee) as director in a subsidiary. These directors can easily surrender to the pressure exerted by the management team of the parent and simply disregard the duty of care expected in the management of the subsidiary.
The pathology of these situations often – but not necessarily – reveals itself in a scenario of insolvency. In insolvency proceedings, as a general rule, transactions entered into in the two year hardening period preceding the onset of insolvency proceedings that are detrimental to the interests of the insolvent estate may be avoided (Art. 71 of the Spanish Insolvency Act). Further to this, the Spanish Insolvency Act taints with a presumption of being detrimental to the insolvent estate all transactions entered into with related parties (including, among others, the companies that belong to the same group of companies as the insolvent company). This, however, does not preclude the possibility of bringing other actions based on fraud or specific actions against directors based on the breach of the duty of loyalty owed to the company.
The judgment of the Supreme Court under review has laid down some guidelines in connection with the duty of loyalty owed by directors in circumstances where the interest of the specific company in which they serve as directors may potentially collide with the so called group interest’ and the circumstances that may – or may not – prevent a finding of liability for breach of such duty.
It is rather frequent to find directors trying to obtain shelter from a liability action being brought by an external minority shareholder on grounds that the particular transaction was beneficial to the group, or that it was instructed by some management body at a group level and therefore they had nothing to do with the ultimate decision to enter into the transaction, or that the transaction was known to the external minority shareholders as it was duly reflected in the financial statements or accounts approved at a shareholders meeting. Other defences are based on the fact that the director did not intend to generate any damage or that the director did not obtain any personal benefit out of the specific transaction.